AHEAD : Ad-Hoc Electronic Auction Design

TL;DR

This paper introduces AHEAD, a novel electronic auction mechanism allowing traders to trade at fixed prices and trigger auctions, improving market microstructure and offering a Nash equilibrium solution.

Contribution

The paper proposes the AHEAD mechanism, a new ad-hoc auction design that enhances market microstructure and provides a Nash equilibrium analysis.

Findings

AHEAD improves market microstructure compared to traditional methods

Nash equilibrium exists in the AHEAD mechanism

AHEAD outperforms periodic auctions and continuous limit order books in certain scenarios

Abstract

We introduce a new matching design for financial transactions in an electronic market. In this mechanism, called ad-hoc electronic auction design (AHEAD), market participants can trade between themselves at a fixed price and trigger an auction when they are no longer satisfied with this fixed price. In this context, we prove that a Nash equilibrium is obtained between market participants. Furthermore, we are able to assess quantitatively the relevance of ad-hoc auctions and to compare them with periodic auctions and continuous limit order books. We show that from the investors' viewpoint, the microstructure of the asset is usually significantly improved when using AHEAD.